Cardboard
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Regarding oil hedges and futures, I read this week that non-commercial net long/short position is at an all time low. This was a very reliable indicator both in mid-March and late-August to coincide with the start of very powerful short covering rallies. If somebody can find that chart that would be great but, I have been unsuccessful this morning.
Related to all of this, who is selling these contracts to the producers? After all, the only user of crude oil in this world are refineries. These guys at the moment are likely eager to enter into future contracts with producers at these $30 prices while producers are likely hesitant to sell out future production a what is a very low price: very low incentive to protect future cash flows at that level or hedging to guarantee a loss when you factor in all costs?
So they have to turn to speculators or non-commercials willing to make that commitment. Since oil is coming down everyday (very consistently, no rally) and with the amount of leverage in these instruments, the profits for speculators are just too good to pass up. To give you an idea, just look at DWTI or a 3X oil bear ETN which is up 4 times since early November and with futures this is multiples of that.
So this is building into a major coiled spring until fear of a short covering rally takes hold. Astronomical profits in the futures market can turn into astronomical losses. What could trigger the next one is unknown but, speculation is very high in this market right now.
Cardboard
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https://www.iaea.org/newscenter/statements/iaea-director-general%E2%80%99s-statement-iran
Iran will now come back on-line officially. That should not be news to the market: sell the rumour, buy the news, but who knows since oil is certainly in a nasty bear market.
The additional amount that will be shipped and when is also a question mark that the market will want answered. They need to book vessels (how many are available and right away?), insurance and get all the letters of credits and everything in order with the banks. How much they have available right away remains highly uncertain. They claim 500,000 barrels a day additional but, I find the news a week or two ago that Iraq reducing production by 200,000 barrels a day this year to be more than a coincidence. Leakage into Iraq during sanctions has certainly occurred since even ISIS is able to sell its oil!!!
Cardboard
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I think it is a mix of fear for credit quality with many of them having been issued since 08 and of lower future distributions. I also think that most people buying these things are retail investors and being income seekers, not accustomed to such sharp moves down. Combine this with low liquidity and the recent end of tax loss selling and you had the recipe for a disaster.
I can understand for the fixed rate reset since some of them will reset at much lower distributions but, you can find some of them staying at current payout until 2019. Some re-setting in 2016 are even quite attractive at the new rate.
For the floaters, the selloff is borderline crazy since you have near zero downside risk on the distribution with the 3 month T-bill approaching zero and the bank prime rate also close to the absolute bottom and you are fully protected for any increase in interest rates.
These things are also marginable. So you can easily structure a basket where you will make an attractive spread vs your borrowing cost (the interest cost also gets a higher deductibility on your taxes vs the dividend income), protect yourself against rising interest rates depending on which ones you choose and likely realize overall an attractive capital gain over time on little money down in a lower risk asset class.
Cardboard
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Even the Baker Hughes rig count report looks bizarre this week... I need a vacation!
14 rigs were removed in the U.S. but, only 1 for oil while there was 3 removed in the Eagle Ford, 7 in the Permian and 2 in the Williston bassin. Normally, these are all oil rigs in these 3 major oil areas. Almost looks like the rig numbers for gas vs oil have been entered in the wrong spot.
Unfortunately, Canada has added a lot of rigs for the second week in a row with 39 for oil. I know this is part of the seasonality but, right now any add hurts.
Another interesting thing about 2016 oil demand. We have had a very significant effect from El Nino. Now forecasters are saying that we have something like an 89% chance following such strong El Nino to have La Nina which is the exact opposite.
http://www.cnbc.com/2016/01/14/la-nina-could-happen-3-months-after-el-nino-ends-socgen.html
Cardboard
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https://www.rt.com/business/328895-transneft-russia-oil-exports/
If these export numbers come to fruition that would cut by about half the estimated current surplus. Add to this the estimated reduction of 600,000 barrels a day of U.S. production and the glut is gone.
The reduction in the rest of the world: North Sea, Brazil, Mexico and elsewhere would cover for any increase in Iranian oil. And the way these guys are cheating on most if not all U.N. resolutions, I have no doubt that the amount of oil "leakage" through Iraq, which is essentially under their control with Shiite leadership in Bagdad and boots on the ground, is not insignificant.
And all of this assume 0 demand growth in 2016 which is not the forecast from anyone.
Cardboard
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Honestly, I am scratching my head on this week EIA's numbers.
Not only are they not matching at all with inventory numbers from API while they were relatively close in prior weeks but, the increase in production from Lower 48 States is incredible.
The agency itself has stated that oil production from shale was coming down for January and February by over 100,000 barrels per month. I mean, where is the offset coming from?
The other fact in their report that is worth mentioning is the once again Adjustment number or Unaccounted for crude oil: 459,000 barrels a day this week and 338,000 barrels a day last week. The only two numbers that can be out of whack to necessitate such adjustment are Lower 48 States production and Crude oil input to refineries (doubts on that being so difficult to estimate with all the regulations on refineries). Alaska production is very accurate. Imports and exports require shipping permits.
So why not stating Lower 48 States production at what they have estimated plus or minus that Adjustment to arrive at a more accurate estimate since the other numbers are pretty much bang on?
It would equate more closely to Lower 48 States production shipped. Of course, producers have tanks in the field but, IMO the EIA has very little insight into that numbers and that is basically what that fudge factor truly represents. 459,000 barrels a day is 3.2 million barrels over the week which is a pretty large number when you consider that people go crazy about inventories in storage tanks going up or down from week to week from a number of similar magnitude.
Cardboard
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Some people are a lot crazier than I am:
http://money.cnn.com/2016/01/14/investing/oil-bailout-us-washington/index.html?iid=hp-stack-dom
Indeed, I would have loved for that f.. Kilduff guy to simply shut up as oil was coming down, as he could not resist always commenting negatively about oil. Probably talking his short book and now he is switched to long...
When I mentioned about the Fed to prop up the oil price, I didn't mean a full TARP program. I had more in mind looking at things such as the uptick rule, crazy levered instruments such as UWTI and DWTI that trades $100 millions per day and discovering if abuses are being committed by hedge funds or other firms via the media, futures market or even via the EIA.
A market cannot be manipulated indefinitely. In the end, it always revert back to its true supply and demand pricing. However, in the short to medium term, the damage from manipulation to profit from shorting can lead to unnecessary and very real pain on Main Street: job losses, suicides, broken families, etc. Don't get me wrong, I also believe that manipulating on the upside is also wrong and has lead to some of what we are experiencing.
And if you were to watch the business media at all, you could and still can clearly see a link being made between oil and stock markets, economies, likely leading to a negative feedback loop. If you think this is too far fetched, then I believe that some countries going belly up such as Venezuela and causing more fear and seizing up of credit in the emerging market asset class is a tangible risk.
The game has now been setup for a supply crunch in a few years instead of a more normal production adjustment that would have occurred at $50 or even $60 oil. The latter was likely what the Saudis had envisioned back in November 2014. Now these guys will also have to endure a lot of unintended consequences from their acts.
Cardboard
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API reported last night that U.S. oil inventories have declined 3.9 million barrels and that is the second week in a row that they are declining with over 5 million the prior week. These inventory numbers are pretty important since when oil plunged to $10 a barrel in the late 90's, storage was full. Does not seem like we will get there, so this whole argument about excesses of 1 to 1.5 million barrels a day for global production seems crazy. The IEA was even suggesting 3 million barrels a day surplus in early summer. If these numbers had any basis in reality, all storage tanks worldwide would have been filled up by now.
http://www.marketwatch.com/story/api-says-us-crude-oil-inventories-fell-last-week-reports-2016-01-12
Now the problem is that inventories of gasoline and distillate (fuel) have increased more than the amount of oil drawn or similar to the prior week.
El Nino is certainly playing a part with the warmer weather which would reduce distillate consumption but, it looks like that this has started to normalize. Gasoline is more worrisome IMO. A recession or worst is certainly the concern with oil going forward. I think that supply is rapidly coming in line and it is worth remembering that the Saudis themselves did cut production in 08/09 to align with demand.
Now, it will be interesting to see what EIA reports at 10:30. These guys have stated publicly that oil production from shale will be declining something like 110,000 barrels a month for January and February. If U.S. production is still above 9.2 million barrels a day in their report then something is truly weird.
In any case, production is coming down and even the producers with the most bravado are forecasting declines for 2016. Being flat is now considered the gold standard.
Cardboard
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Yeah, if everything was free then nobody would have to work. Why not your milk, car, even your house? What would give you a kick in the ass in the morning to do something? Communism anyone?
My point was all about fair pricing which means a balance between supply and demand. It is also about trying to reduce financial manipulations and dislocations that create true problems on Main Street.
I am all about the truth and free markets. However, I am against a manipulative media, bear raids, crooks, corrupt governments. I don't think we have to go that far to prove that bear raids can destroy companies and even the entire financial system.
Cardboard
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http://www.cnbc.com/2016/01/08/scientists-hail-breakthrough-in-alzheimers-research.html
Is this research good news for TauRx?
Cardboard
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I would argue Ericopoly that this benefit from lower oil price has already occurred: SUV sales are at record.
My point is that there is a limit as to how far this should be allowed to go since the unintended consequences are much greater than the benefit from savings. It is the multiplier effect that I am worried about.
Cardboard
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If I was Yellen, I would immediately contact my Chinese, ECB and Japanese counterparts and mount an operation to prop up the price of oil or at least remove the short punch bowl from Goldman Sachs and some others. I would also call Obama and ask him wtf he is up to with the Saudis.
This never ending decline in the price of oil is very negative for many reasons:
1- Can`t normalize interest rates. With zero inflation or no fear of it, it is very hard to increase interest rates to a more normal level. With the oil price being so weak, everyone fears that something is wrong and we are at 5.0% unemployment!!!
2- This low oil price is going to make S&P earnings negative for the first time since 2008. The implications cannot be clearer: when S&P earnings go down, the S&P has a really hard time staying up which is at some point bad for the economy: wealth effect, fear, etc.
3- The longer this continues, the more bankruptcies there will be related to the oil patch. A junk bond panic is not a desirable outcome IMO. While I favour market forces to sort out what is viable and what is not, a 2008 style crisis and the risk of contagion to other markets is not good for anyone.
4- Despite strong consumption, with oil being this low you cannot but, wonder if China is about to enter some kind of calamity. If oil was to only go back to $40, a lot of fear would be removed from the Chinese stock market giving them time for their own wealth effect to workout and help their transition away from an entirely export driven economy.
5- $40 or $50 oil won`t bring any new supply. You may get some uncompleted wells being put on stream but, there will be no gold rush whatsoever and with what has been cancelled already in the $100`s of billions and decline rates, supply should still come down.
As you may guess, I have a vested interest in oil going higher from here. At the same time, I have a vested interest in this World not self destructing itself because of some greedy short idiots or some other conspiration going on (bankrupting Russia?). Moreover, the creation of a massive supply crunch 2 years down the road is going to really hurt the global economy.
We are starting to see the unintended consequences of a collapsing oil price. I think that stability is required here and that $60 oil is a desirable outcome: no supply crunch, no depression.
Cardboard
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Maybe it is just me but, I have heard very little in the media or from investors about the very strong rebound in natural gas since its sharp nosedive due to the warm weather in December. The upturn has been holding up very strong even during this terrible week.
Even the weather is not that cold yet with much warmer conditions than usual this weekend. Maybe that supply and demand will finally work their magic?
If this continues, this bodes well for producers and I would say LNG projects. It is counter-intuitive for LNG since you would think that the lower the price the better but, you also need a vibrant upstream to make enough supply available at a price good for everyone, some balance.
Cardboard
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IMO, the most dangerous opportunities, and likely the most profitable, are Canadian E&P's: PWT, GXE, BXE come to mind. SGY and RMP would be safer but, less upside. The CDN$ is a wonderful hedge for all of them vs their U.S. counterparts although, you have to look at their debt too since some have U.S. $ debt.
Cardboard
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How long before direct hits occur between Iran and Saudi Arabia?
http://www.bbc.com/news/world-middle-east-35251917
Cardboard
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http://www.wsj.com/articles/isis-assault-endangers-future-of-libyas-oil-industry-1452088994
Wall Street is an amazing machine. OPEC does not cut production, as expected, and the price goes down from $40+ to $34. Now Iran and Saudi Arabia are fighting each other "diplomatically" and the price goes down because they won't cooperate on a production cut which was already news...
Anyway, this attack is real and some Libyan capacity has just been removed. I really don't understand how there could have been so much Middle East supply risk premium built into the price 2 years ago and now it seems like a negative risk premium is built-in with everything that is happening?
Cardboard
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With the oil price coming down almost daily and the incessant barrage of glut news from the mainstream media, you really need to have a strong stomach to invest in that field.
However, I do believe that those who are resisting to invest now will regret it as much as those who have stayed in cash in early 2009. And if oil continues heading down, then everything will come down this time around; FANG overvalued marchandise included.
There is no confirmation bias into natural decline rates, capex cuts in the $100's of billions, continued increasing demand and a Middle East as unstable as ever which has an impact on cargo insurance rates.
Regarding Saudi Arabia, the regime is as maniacal as the Iranian religious regime. They feel like they have lost their defender or the United States and they will do everything to stay in power. I think that some here need to realize that one of their ally is Pakistan which is also an enemy of Iran. All it would take to give Saudi Arabia once again the upper hand over Iran and Russia without the help of the United States is for one cargo to arrive from Pakistan.
The West and Chinese would not be able to do anything like imposing sanctions since they need the cheap oil. The Russians would be pissed but, would not engage in a conflict with a nuclear Saudi Arabia. Then Iran would have no choice but, to break the nuclear deal and likely seek help from Russia. Would sanctions be re-imposed or not? Would Israel let all that happen doing nothing?
People have long speculated that Saudi Arabia would become nuclear following Iran but, now that tables have turned and that the Saudis are the ones in the corner with no tangible strong ally, surrounded by enemies, fighting two wars (Yemen and ISIS) and a budget deficit that will approach $100 billion again this year, what is to say that they are not the desperate ones now?
Cardboard
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http://phx.corporate-ir.net/phoenix.zhtml?c=79687&p=irol-reportsother
This was a very bullish rig count IMO. Canada was down huge with 32 for oil and 11 for gas. A drop of 34% in the overall rig count in one week!
Not sure what this is all about since road bans are in the Spring. Such a drop has to impact production.
The U.S. was down only 2 oil rigs but, down 5 horizontal and up 3 vertical. The 3 additional vertical rigs look like conventional drilling in the Permian. These are cheaper to drill. Maybe also to honor drilling commitments to keep leases.
The data seems to indicate tightening budgets and much less incentives to drill with these prices. At some point, this will show up in the production reports and inventories unless the law of nature has been repealed.
Cardboard
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" it doesn't appear that the U.S. carrier was ever in danger, or fired upon"
No the rockets were not fired at the carrier and they have a Phalanx defense systems which would easily intercept such rockets but, do you imagine if the Chinese had sent a similar ship firing rockets that close by when the destroyer approached their man made island?
1,500 yards is pretty close for a vessel of that size. And why did the Iranian chose that moment when the carrier crosses the Straight?
All I can say is that they are not demonstrating good intentions despite Obama naivety. Since signing the accord, they have broken various U.N. resolutions such as test-firing ballistic missiles and sending one of their general to Moscow.
Cardboard
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Thanks for the articles/videos Goldfinger.
Predictions for a lower oil price in early 2014 did not come from Goldman Sachs but, from smaller, more specialized outfits such as PIRA Energy Group. The big banks were forecasting instead for oil to go up around 20% from $100 or the usual 20% higher or lower from the current trend.
The EIA report today was another total joke with an enormous swing in Other Oils of 5.6 million barrels, another large reversal in Adjustment (Unaccounted-for Crude Oil) of 463,000 barrels/day or 3.24 million barrels for the week and again a small increase in U.S. production to finish the year just above 9.2 million barrels a day. Good job guys! The energy revolution is alive!
In other news and when I saw that first I had to double check the source but, this is crazy:
Apparently, the Iranian navy only gave a 23 minute warning and this happened on Saturday. Makes you wonder what happens real time???
Clearly if I was Obama, I would cut another sweet deal with these guys. They are definitely on the right track to join the league of peaceful nations. This is a clear indication that they cooperating fully with the nuclear agreement and not hiding anything...
Cardboard
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When a company is mostly investing in commodity related businesses, then its results will look ugly during the down cycle. However, from everything I have read, even if you are to make drastic cuts to their holdings and going as far as using $0 for many, the share price is still trading below NAV.
Now we are talking preferred's. So if there is any indication of value left for common shareholders then the preferred's should be trending to par over the long term. The company is obligated to continue paying the dividend at the agreed rate forever. The only way for them to stop that is to buy it back at par, make a sweat offer to holders but, at less than par or to buy them back on the stock market.
Regarding the debacle that has happened to preferred's in Canada this year, a lot of that is based on fear. Fear that interest rates will go lower and forever... And even that logic is stupid. If you take a look at a large list of these, the vast majority were trading between $20 and $25 just 9 months ago. So I suppose that back then, and during the prior years, that the dividend yield obtained by investors on these instruments was considered sufficient and attractive enough vs the risk and other income avenues out there?
Let me give an example: BCE.PR.H. This floater pays a dividend based on the Canadian Prime Rate fixed by banks. It is at 2.7% currently. So that is the privilege rate that your bank will lend money to you. The lowest rate you can obtain without offering a guarantee such as a home. If you turn around and ask them how much they will give you in interest for your funds without any holding period, it will be in the 0.5% range. So this instrument gives you the same as they charge you as income but, taxed much lower than regular interest.
The Bank of Canada has cut twice its rate this year by 0.25% each time. The banks did not fully follow and have cut their Prime Rate by 0.15% each time. The Bank of Canada rate is now 0.5%, so if they cut it to 0% and banks continue their pattern of cutting only by 0.15%, then the absolute low for the bank prime rate is 2.4%. And since banks in the past were cutting by the same percentage as the Bank of Canada (I think it was the first time ever that they didn't), will they follow at all or just cut by 0.10% next time?
Based on par of $25, that 2.4% would mean an annual distribution of $0.60. The thing trades at $13.20 for a yield of 4.55% based on that distribution. However, based on the current 2.7%, the distribution is $0.675 for a yield of 5.11%.
Where can you get that kind of income or the equivalent in interest of 7%+ after tax with near zero risk of default and with full participation or protection in any increase in interest rates?
I mean, even if you believe that interest rates will remain as is for the foreseeable future, isn't this yield way too high vs what you can get from a GIC, treasury bond or other income instrument? And in these you are locked in. Either you will lose value on any increase in interest rates or be forced to hold to maturity.
Cardboard
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http://www.reuters.com/article/enterprise-products-exports-idUSL3N14C3MP20151223
This is excellent news. Light oil is finally going to get exported to refineries that need it. Although, they have made adjustments to use more, most U.S. refineries were designed to process heavier crude. This will narrow the discount between Brent and WTI and should reduce prices at the pump.
The reversal of Line 9B, now finally operational, is also helping move oil out of the middle of the Continent. This WTI discount should now be a thing of the past.
The U.S. with its exports will also go around the Saudi monopoly where they own some U.S. refineries that are forced to import Saudi oil. In effect reducing demand for U.S. produced oil.
Cardboard
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My challenge is simply what it is. It is not much different IMO than Musk himself challenging the high speed train in California to push the idea of the hyperloop.
I still think that rockets are unreliable and unsafe if you are to look at the percentage of catastrophic failures and you don't need to be a rocket scientist to observe that!
Now if there is nothing cheaper, after including all catastrophic failure costs including loss of life and payloads, then so be it. Maybe that Red Bull will do it with a balloon?
Brings me back to another question. Where is Lockheed, Boeing and all the rest of them? They have a ton of experience, manufacturing, patents, etc. They make ICBM's on a regular basis. They can't make the same stuff as startups Musk and Bezos? The rate of return is too unattractive?
I find that bizarre since Tesla has competition from Nissan, Chevrolet and some others. And actually much cheaper products doing the same thing. Sorry for Tesla owners but, that is all the car has extra: luxury.
He has competition too for his solar panels.
Cardboard
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U.S. oil inventories are down 5.9 million barrels this week against expectations of a build of 600,000 barrels. API reported down 3.6 million last night. That information you can rely on.
On the production side, I still don't know what game EIA is playing. They showed Lower 48 States production up by 1,000 barrels a day... Such a minuscule change on 8.653 million barrels a day. I truly believe that they move this up or down every week to just look like they are doing their job.
However, there is a significant balancing item called: Adjustment (Unaccounted-for Crude Oil). This week it is down 377,000 barrels a day. Last week it was up 254,000. That is 2.639 million barrels for the week that are unaccounted for. A swing of 631,000 barrels a day or 4.417 million barrels on inventories that are down 5.9 million barrels week over week.
I guess that they absolutely want to show that U.S. production at year end is 9.175 million barrels a day. Then they will come out in January with some big one time adjustment, like they did in August if I recall, to take it down to its true amount.
Cardboard
Oil, wow, WTF happened to all of the oil bugs on this site?
in General Discussion
Posted
I think it is getting out of hand too. March Brent at $27.88 is now selling almost a full 1$ below February WTI. Some of these guys will face a lot of hardship and I feel good about it.
Now if the 5th fleet could only go back home and let the bombs fly.
Cardboard